If Robin Hood stole from the rich, is a “Robin Hood Tax” a form of theft?
A “Robin Hood Tax” is based on the idea that the financial sector is too large and should be taxed more to pay for social services. The most popular form of this proposal is a financial transactions tax, levied on “transactions like stocks, bonds, foreign currency and derivatives.” The young man in the video above seems to peg his proposal at a 0.5% fee.
This is a fundamental misunderstanding of what ails the economy. Kenneth Rogoff, an economist at Harvard, lays out the obvious case: when you tax something, you get less of it.
Such taxes surely reduce liquidity in financial markets. With fewer trades, the information content of prices is arguably reduced. But both theoretical and simulation results suggest no obvious decline in volatility. And, while raising so much revenue with so low a tax rate sounds grand, the declining volume of trades would shrink the tax base precipitously. As a result, the ultimate revenue gains are likely to prove disappointing, as Sweden discovered when it attempted to tax financial transactions two decades ago.
Financial transactions taxes have been more popularly proposed in Europe, and even elected Democrats have been hesitant to embrace these forms of “Robin Hood” taxes. Thankfully, the U.S. hasn’t succumbed to such appeals to emotion.